New Iran Sanctions Add Significant Compliance Risks for U.S. Companies and Foreign Subsidiaries
Kelley Drye Client Advisory
In February of this year, we reported on new and proposed changes to the Iran sanctions regime and what they could mean for American companies. Late yesterday, Congress passed the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITR Act”). The ITR Act, along with a new Executive Order issued on July 31, 2012, significantly expands U.S. sanctions against Iran to the foreign subsidiaries of U.S. companies. These entities have been outside the purview of many of the United States’ Iranian sanctions laws and regulations to date. Many of the new rules are immediately effective. While other provisions include a short grace period, time is up for companies to determine how to address existing business ties to Iran, and how to avoid Iran connections in the future. Withdrawing from current relationships and implementing appropriate compliance procedures are both complicated tasks that should be faced in close consultation with counsel. The summaries below represent the provisions of the ITR Act and the July 31st Executive Order most immediately relevant to U.S.-based multinational companies.
ITR Act Section 218Where the ITR Act “strengthens current U.S. law by leaps and bounds,” as stated by U.S. Rep. Ileana Ros-Lehtinen (R-FL), Chairman of the House Foreign Affairs Committee, is in Section 218. This provision allows civil penalties to be assessed against a U.S. company for transactions between a foreign company it owns or controls and the Government of Iran or any Iranian national that would be otherwise unlawful if committed by a U.S. person, including conduct prohibited under the current U.S. economic sanctions against Iran. In other words, the implementation of U.S. parent company liability for the acts of its foreign subsidiaries elevates the current Iran sanctions regime to a breadth comparable to the current sanctions against Cuba under the Trading With the Enemy Act. This particular provision is not effective immediately, but rather 60 days after the date of enactment of the ITR Act. This should not be considered a long lead time, however, especially for U.S. companies with multiple foreign subsidiaries that may have pending contracts, existing distributor relationships, and other long-term ties to Iran. There is a “safe harbor” provision excluding applicability to U.S. persons that divest or terminate business with offending foreign entities within 180 days of enactment.
ITR Act Section 219Another provision of the ITR Act to note is Section 219, which amends the Securities Exchange Act of 1934. Section 219 requires any issuer – American or foreign – to make detailed disclosures in annual or quarterly SEC filings as to whether they or any “affiliate” have knowingly engaged in certain activity prohibited by the Iran Sanctions Act, by CISADA, or by certain Executive Orders designating Iranian persons and entities, including the Government of Iran. Section 219 also requires notice of such a disclosure to be provided to the Commission, which will then make the notice public on its website and transmit the annual or quarterly report in which the disclosure is made to the President and Congress. This rule, along with the Commission’s inclination to issue comment letters regarding companies’ business in Iran and other sanctioned countries, are based upon the rationale that activities involving Iran are qualitatively, if not quantitatively, material to investors.
ITR Act Sections 201 and 204Sections 201 and 204 amend the Iran Sanctions Act of 1996 (which was, in turn, amended by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”)) in several key ways. It is important to note that the Iran Sanctions Act’s prohibitions apply to “any person,” not just U.S. persons. Thus, the ITR Act expands the scope of sanctionable conduct for both U.S. and non-U.S. entities. Section 201 of the ITR Act increases the minimum number of sanctions to be selected from the sanctions menu and imposed on a liable person from “3 or more” to “5 or more.” It also expands the restriction on the provision of goods, services, technology, or support for maintenance or expansion of Iran’s domestic production of refined petroleum products to include support for directly associated infrastructure (including port facilities, railways, and roads). Section 201 creates additional prohibitions against joint ventures with the Government of Iran to develop petroleum resources outside of Iran, and against the provision of goods, services, technology, or support (above a certain monetary threshold) for Iran’s ability to develop petroleum resources in Iran and for the maintenance or expansion of Iran’s domestic production of petrochemical products.
Section 204 of the ITR Act also amends the Iran Sanctions Act by adding three sanctions to the menu of penalties to be imposed on a sanctioned person: (1) a ban on investment in the equity or debt of the sanction person or entity; (2) exclusion of a sanctioned entity’s corporate officers or controlling shareholders from the United States (i.e., visa denial); or (3) imposition of any of the available sanctions on the principal executive officers of a sanctioned entity.
July 31, 2012 Executive OrderThe White House has also been busy ramping up the Iran sanctions regime. The President issued an Executive Order earlier this week that, among other things, permits the imposition of sanctions on a person for knowingly engaging in a significant transaction for the purchase of petroleum, petroleum products, or petrochemical products from Iran. Like the Iran Sanctions Act, this Executive Order is not limited in its applicability to U.S. persons or entities. Thus, it covers the conduct of foreign persons and entities, and allows for sanctions to be imposed on owning or controlling entities that knew of the foreign company’s conduct. The Executive Order also reaches any person that has provided goods, services, or support for the National Iranian Oil Company, the Naftiran Intertrade Company, or the Central Bank of Iran, or has assisted the Government of Iran in acquiring U.S. bank notes or precious metals.
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